Thursday, June 2, 2011

Profit Plans

The current economic plan is to set up enemies to blame for whatever goes wrong. While claiming to be a friend of business, this Administration has fed the populist urge to blame banks, oil companies, drug companies, insurance companies and any other industry that makes a profit – unless they are heavily unionized or in Nancy Pelosi’s district. Favorites get waivers from Obamacare and subsidies; those who are not get audited, increasing regulated, don’t get waivers and are blamed for anything that goes wrong.

The latest plan is to eliminate tax breaks for oil companies and make then pay more taxes – a popular stance. The oil companies announce high profits and are an easy target but a thought or two would be instructive.

The first thing to note is that no corporation really pays taxes. Companies get money by selling something to customers; the money corporations use to pay their taxes comes from - customers. Suppose you own a business selling widgets and tomorrow there is an additional 10% widget tax. What do you do? Probably raise your prices about 10%. So who is paying the tax?

It is no surprise that big companies make more profit in total dollars than small ones. They have more invested. It is also no surprise that they make more when prices rise. The reason is profit margin - the return of their money. Suppose you risk $100 in an investment and at the end of a year you have $110. Pretty good these days, you made 10%. But suppose you risk $10,000 and at the end of the year you had $10,010. Both investments made $10 but one guy did well and one guy didn’t because their return percentage was markedly different. Oil companies have billions invested and they make billions but their margin is not particularly high.

Headlines about how much money a company makes in absolute dollars is not particularly informative. But this is helpful to the demagogues who have a need to blame someone else and distract from the Administration’s efforts to raise fuel prices in every way they can. The Secretary of Energy is on record as supporting higher oil prices; the EPA puts all kinds of roadblocks in the path of the oil companies; leases are discouraged; oil flow from Alaska is reduced; drilling is pushed to the most expensive places to drill. All of these things contribute to higher fuel prices. While this is all happening, additional dollars are being printed. When the dollar’s value goes down, oil prices go up. Their need for a scapegoat is obvious.

Ending subsidies is not a bad idea but singling out one industry is and most of the tax deductions under discussion are available to all businesses. Ending all subsidies is a different discussion but the plan to end subsidies for oil and continue to subsidize the energy producers that are currently in favor just creates another Government Motors. Does anyone think these government subsidies will end? If these energy producers need government subsidies to succeed we are only creating another ward of the State.

Whether solar, wind or bio-fuels become economically feasible is something that will be determined in the future. Whether anyone likes it or not, there are no viable and affordable wind/solar/biofuel/hybrid cars available and when they are available, it will be quite a while before people can afford to replace their current cars. While the Administration devotes its efforts to increasing oil prices in order to assist sources that might be of use in 10 years, we get $4+ gas prices.

Administration efforts to increase oil prices and blame the messenger have to stop. More importantly, the reasons for the increases need to be properly identified so that corrective measures can be directed at the real root causes.

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